Saturday, June 6, 2020

The Closing Bell



6/6/20


Statistical Summary

   Current Economic Forecast
                       
2019 estimates (revised)

Real Growth in Gross Domestic Product                          1.5-2.5%
                        Inflation                                                                          +1.5-2%
                        Corporate Profits                                                                6-9%

            2020

Real Growth in Gross Domestic Product                               ?
                        Inflation                                                                                  ?
                        Corporate Profits                                                                    ?


   Current Market Forecast
           
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Trading Range                      18210-29540
Intermediate Term Uptrend                     16100-32301
Long Term Uptrend                                  6965-38183

                        2019     Year End Fair Value                                   14500-14700

                        2020     Year End Fair Value                                   15100-15300

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Trading Range                          2188-3398
                                    Intermediate Term Trading Range              1813-3398                                                          Long Term Uptrend                                     1343-4978
                       
2019 Year End Fair Value                                     1790-1810

2020 Year End Fair Value                                       1870-1890         
                       

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                           48%
            High Yield Portfolio                                     50%
            Aggressive Growth Portfolio                        54%

Economics/Politics
           
The economic dataflow is coming in better (less bad) than consensus, meaning that while the US is almost certainly in a recession, it is likely not as deep and will not be as long as originally anticipated.  That said, there are too many unknowns to make any semblance of a forecast.  In my opinion, the economy will be a question mark at best until there is some visibility to the magnitude and extent of a recovery as well as the impact that the virus/lockdown will have on American work, social and spending patterns.
               
The data this week was upbeat, including the primary indicators and especially the stunning jobs report.  It is still a bit too early to be drawing conclusions about the magnitude of the current economic decline or the recovery; but the jobs reports certainly suggests that the worst is behind us.
                  
Overseas stats were once again very promising.

Short term, this good news likely means that those economies around the globe that are re-opening are doing so at a more robust pace than had been anticipated.  But to remain positive assumes that those reopenings will continue to be effectively executed and that the predicted ‘second wave’ of infections will be well contained. Longer term, the economy will be shaped by how quickly virus treatments and a vaccine are discovered as well as the permanent impact this disease/government reaction will have on the spending and work habits of the nation. 

Economic predictions are useless right now.


I am not altering my long term economic outlook, which is that the economy will continue to grow at a subpar secular rate due to the twin burdens of egregiously irresponsible fiscal and monetary policies---which, by the way, are becoming even more egregiously irresponsible as a result of measures being taken by the government and the Fed in dealing with the current crisis.
                       

The Market-Disciplined Investing
           
  Technical

On the back of that blowout jobs number, the Averages  (27110, 3193) exploded higher.  Both of the indices remain in very short term uptrends.  The DJIA finished above its 200 DMA (now resistance; if it remains there through the close on Wednesday, it will revert to support).  The one negative is those huge 5/18 gap opens that remain unfilled---made worse but another set of significant gap up opens on Friday.  Still my assumption continues to be that equity prices’ bias is to the upside.  Indeed, we could be in the midst of a blow off top.

GLD weakened again, falling below the upper boundary of its very short term uptrend but more importantly making its first lower low since the bounce that started in March.   Meanwhile, the long bond continues to make a new lower low and ended below its 100 DMA (now support; if it remains there through the close on Tuesday, it will revert to resistance).  The dollar was also down again on volume, remaining in a newly reset very short term downtrend.  GLD remains the strongest of the lot but yesterday’s weakness confuses the fundamental picture with respect to growth and inflation.

                 Friday in the charts.

Fundamental-A Dividend Growth Investment Strategy

The DJIA and the S&P are above ‘Fair Value’ (as calculated by our Valuation Model).  At the moment, the important factors bearing on Fair Value (corporate profitability and the rate at which it is discounted) are:

(1)   the extent to which the economy is growing---which it clearly is not but that surprising jobs report suggests that it may resume quicker than almost anyone expected.  That is great news short term.  It also suggests that that Mr. Market was dead on in anticipating a more rapid improvement in the economy than I or anyone else that I have read anticipated.

That said, to judge the economy’s long erm secular growth rate, we still need to know more about [a] the ultimate magnitude of the economic consequences of the government/Fed’s actions to combat the virus in terms of lost wages, sales and profits and [b] how much this whole coronavirus affair will alter Americans’ long term living/spending habits.

In my opinion, it is those factors that will ultimately play a key role in determining the Market’s Fair Value; and there remains so much about them that we simply do not know.  In the meantime, investors are valuing many equities at the same or higher valuations than pre-coronavirus, pre-US/Chinese trade tensions and pre-riots levels.  In short, however upbeat this weeks’ economic data has been, its effect on stock valuations may be overdone.

There are two other factors to consider. 

[a] short term, the tensions between the US and China continue to build.  This week, the US imposed restrictions on the Chinese media and barred Chinese passenger plane flights to the US.  The risk here, of course, is a major schism {or worse}with a huge trading partner which would certainly be a negative for the economy and potentially the Markets.

[b] longer term, with all the spending to offset the results of a national lockdown, the budget deficit/national debt has gotten out of hand.  As you know, I believe that once the national debt reaches a certain size relative to GDP {the US, the EU and Japan are already there}, the debt has a stifling effect on economic growth.  Even under the best case {‘V’ shaped} recovery scenario, that extra debt will still be there, usurping capital from the private sector and inhibiting its growth and profitability.  I believe that stunted economic growth will ultimately work its way into equity valuations.

Trump says that there is more to come.

(2)   the resumption of QE by the global central banks.  Money printing is occurring with a vengeance by the global central banks.  This week, the ECB plugged its firehose into the EU financial system.  As you know, I believe that global central banks’ QEInfinity policies have destroyed one of the Market’s primary functions which is the pricing of risk and the efficient allocation of capital; and that there will be an ultimate price to pay.

That said, throughout the entire QEInfinity experiment, investors have shown a complete disregard for its consequences.  Until they do, the bias in stock prices will remain to the upside.


The unintended consequences of the Fed’s debt purchase program.

Bottom line:  I believe that the Averages and most segments of the Market are overvalued [as determined by my Valuation Model].  This is not a time to be buying equities.
                       
            Nonetheless, there are certain segments of the Market that have been punished severely  with the stocks of the companies serving those industries down 30-70%.  As a result, I will be putting cash to work in these beaten up stocks on any Market decline. 
       
As a reminder, my Portfolio’s cash position did not reach its current level as a result of the Valuation Models estimate of Fair Value for the Averages.  Rather I apply it to each stock in my Portfolio and when a stock reaches its Sell Half Range (overvalued), I reduce the size of that holding.  That forces me to recognize a portion of the profit of a successful investment and, just as important, build a reserve to buy stocks cheaply when the inevitable decline occurs.








Friday, June 5, 2020

The Morning Call--Shocking jobs report


The Morning Call

6/5/20

The Market
         
    Technical

After a day of see sawing between being plus or minus, the Averages  (26281, 3112) closed mixed on the day (Dow up. S&P down)---not surprising given their increasingly overbought condition.  Both of the indices remain in very short term uptrends.   Having successfully challenged its 100 DMA, the DJIA finished right on its 200 DMA---for stocks to maintain upward momentum, it needs to catch up to the S&P which is already well above its 200 DMA.  The one negative is those huge 5/18 gap opens that remain unfilled but which, at the moment, appear irrelevant.  My assumption continues to be that equity prices’ bias is to the upside.

GLD bounced hard off the upper boundary of its short term uptrend, leaving its upward trend intact.  Meanwhile, the long bond made a new lower low and ended right on its 100 DMA (now support).  The dollar was down again on volume, remaining in a newly reset very short term downtrend. The deviation of gold from TLT and UUP points to rising inflation fears.  Of course, this is a one day phenomena; so, we need more time to confirm that thesis.

            Thursday in the charts.

    Fundamental

       Headlines

            The economy

Yesterday’s numbers were negative.  Weekly jobless claims, Q1 unit labor costs and the April trade balance did not meet expectations while Q1 nonfarm productivity was much better than anticipated.

            The recovery alphabet soup.

            How valid is the Markets optimism for economic recovery?

More fiscal stimulus coming.

Overseas, April EU retail sales, the May EU construction PMI came in above estimates while the May UK construction was below.
                     
            The coronavirus

            Looters, lockdowners and the law.

            Did Sweden’s strategy backfire?

            The Fed

            The Powell bubble.

            Reality repression.

Bottom line.  barring an unexpectedly damaging second wave of the coronavirus, the economy is likely through the worst of the recession.  However, as I continue to note, we still have no idea what the lockdown’s ultimate impact will be on American’s spending, social and work habits. 

And yet, investors are tip toeing through the tulips. To me the only explanation for this total breakdown of the relationship between price and value is QE; and I have no clue when and how this disconnect corrects itself.  Invest accordingly.

The latest from Jeremy Grantham.
           
The case for buying everything.

            More on valuations.

            Hedge funds brace for second stock market decline.

            Don’t overjudge yourself.

                        This analyst makes a great point:  a major axiom of Wall Street is to not let a trade turn into an investment (i.e. buy a stock for a quick pop, you are wrong and instead of selling immediately, you hold on and watch it go down further).  But what do you do when an investment turns into a trade? (i.e. you buy a stock to hold for the long term and it skyrockets to your price objective almost immediately---like what is happening now with stocks bought in late March that have since appreciated 40-50%.)  I would be a Seller but it is an interesting problem to ponder.
             
    News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

      US

            May nonfarm payrolls increased 2,509,000 jobs versus and anticipated decline of 8,000,000; the unemployment rate was 13.3% versus projections of 19.8%.

     International

            April Japanese household spending fell 6.2% versus forecasts of -8.7%; its April leading economic indicators came in at 76.2 versus 84.5.

            April German factory orders declined 25.8% versus estimates of -19.7%.

            May UK consumer confidence was reported at -36 versus expectations of -34.

    Other

            Commercial versus household bankruptcies in May 2020.

                Median household income in April 2020.

What I am reading today

            Americans can’t agree on what to be outraged about.

            Why patents work.

            Self-diluting euphemisms.

Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Thursday, June 4, 2020

The Morning Call---The ECB cranks up the volume


The Morning Call

6/4/20

The Market
         
    Technical

The Averages  (26269, 3122) had another great day. Both of the indices remain in very short term uptrends.   The Dow finished above its 100 DMA for a third day, reverting to support (and joining the S&P in doing so).  The one negative is those huge 5/18 gap opens that remain unfilled but which, at the moment, appear irrelevant.  My assumption continues to be that equity prices’ bias is to the upside though they are getting overbought.

GLD was off, ending right on the upper boundary of its short term uptrend---not necessarily a negative but a sign of the loss of upside momentum.  Meanwhile, the long bond made a new lower low and setting a new very short term downtrend.  Ditto, the dollar.  It got hammered on huge volume and set a new very short term downtrend. It appears these investors believe the economy is recovering robustly.

            Wednesday in the chart.

    Fundamental

       Headlines

            Yesterday’s stats were upbeat. April factory orders, April construction spending, the May ISM nonmanufacturing index and the May ADP private payroll report were better than anticipated while weekly mortgage/purchase applications were mixed.

            Overseas, the May EU final manufacturing PMI, the May final EU, UK, German, Japanese and Chinese  services and composite PMI’s plus the April EU unemployment rate were better than estimates while the April EU PPI and the May German unemployment rate were disappointing.

            The coronavirus

            ***overnight update.

            Update on US coronavirus stats.

            Global update on the coronavirus.

            How we got in this mess.

            Some facts worth knowing.
              
            The Fed

            ***overnight, the ECB cranks up the volume.

            The Fed faces a day of reckoning.

            The limits on monetary policy.

                Fed expands muni bailout facility.

                Bill Dudley steps on his dick, again.
               
                China

            Trump imposes restrictions on Chinese media.

                Trump bars Chinese passenger plane flights to US.

                UK considers offering citizenship to Hong Kong residents.

Bottom line.  the economy appears to be stronger than had been expected; but that does not mean it will avoid a deep recession.   But we still have no idea what the lockdowns ultimate impact will be on American’s spending, social and work habits. 

And yet, investors are tip toeing through the tulips. To me the only explanation for this total breakdown of the relationship between price and value is QE; and I have no clue when and how this disconnect corrects itself.  For the moment, as I said yesterday, the Market’s pin action has similarities to a blow off top.  Invest accordingly.

            More on valuations.

    News on Stocks in Our Portfolios
 
            General Dynamics (NYSE:GD) declares $1.10/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            Weekly jobless claims increased 1,877,000 versus projections of 1,800,000.

            Q1 nonfarm productivity came in at down 0.9% versus expectations of -2.7%; until labor costs rose 5.1% versus 5.0%.

            April factory orders fell 13% versus estimates of -14%; ex transportation, they were -8.5% versus -9.0%.

            The April trade balance was -$49.4 billion versus consensus of -$49.0 billion.

            The May ISM nonmanufacturing index came in at 45.5 versus forecasts of 41.8.

     International

            April EU retail sales fell 11.7% versus expectations of -15.0%.

            The May EU construction PMI was 39.5 versus projections of 34.0; the UK construction PMI was 28.9 versus 29.7

    Other

What I am reading today

            Dealing with uncertainty, Part 2.

            How big it the racial wealth gap?
            https://ofdollarsanddata.com/racial-wealth-gap/        

            Why we can’t learn from history.

            Organized looters.

Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.